The Wacasey Equation

The Wacasey Equation is an algebraic formula that can be used to quickly and easily compare the economic benefit of different health insurance plans. Notably, it does not include deductibles as a factor in determining the ultimate value of a given policy. It was devised by Kevin Wacasey, M.D., and is expressed as:
P + O = T
Where:
P = the annual premium, or cost of purchasing health insurance, for a given year
O = the out-of-pocket maximum on healthcare costs, for a given year
T = the total amount spent for health insurance and healthcare in a given year
Background
With the advent of managed care in the mid-1970s, virtually all healthcare costs for most privately insured Americans were paid for by their health insurance, with the exception of nominal co-pays. By the early 2000s however, health insurers began lowering their costs by shifting risk to their insured in the form of higher co-pays and deductibles. Another way of cost sharing was accomplished through the introduction of co-insurance, or the amount paid for healthcare services after an insured has already met their deductible.
In 2010, the Patient Protection and Affordable Care Act established caps on what an individual or family may ultimately pay for healthcare (not including health insurance premiums) in a given year. For 2015, these out-of-pocket maximums will be $6,600 for individuals, and $13,200 for families. However, in most cases these out-of-pocket maximum amounts exceed insurance plan deductibles, often by thousands of dollars.
Importance of Deductibles
Given the average American's concern over the rising costs of healthcare, the importance of the deductible when purchasing health insurance has traditionally been second only to the premium as a consideration. This idea is still held by many today - in a June 2014 survey conducted by the Kaiser Family Foundation, 72% of respondents reported that deductibles are at least "very important" in choosing a health insurance policy, and a December 2013 poll showed that many Americans view rising deductibles negatively.
Eliminating Deductibles from the Equation
The Wacasey Equation postulates that, because of the introduction of the out-of-pocket maximum, the deductible is no longer a valid consideration when purchasing health insurance.
Using D to represent the deductible, this can be expressed algebraically as:
P + [D + (O - D)] = T
Simplifying [D + (O - D)], where the D's cancel each other out:
[D + (O - D)] = O
Therefore:
P + O = T
Examples
Birdville Independent School District
For plan year 2014-2015, the Birdville Independent School District in Haltom City, Texas, procured health insurance for its employees through the Teachers Retirement System of Texas. Three broad categories of plans were offered: Active Care 1-HD (Bronze), Active Care Select (Silver), and Active Care 2 (Gold). For employees who purchased family coverage, applying the Wacasey Equation yields:
Active Care 1-HD (Bronze - $5,000 Deductible): $10,860 + $9,200 = $20,060
Active Care Select (Silver - $3,600 Deductible): $11,976 + $9,200 = $21,176
Active Care 2 (Gold - $0 Deductible): $12,996 + $12,000 = $24,996
Freelancers Insurance Company
The Freelancers Insurance Company is associated with the Freelancers Union, and specializes in providing insurance to independent contractors ("freelancers") and others who do not qualify for employer-sponsored health benefits. For 2015, several different health insurance plans are offered, and for single persons who purchase individual coverage, applying the Wacasey Equation yields:
Catastrophic 6600 ($6,600 Deductible): $2,372.76 + $6,600 = $8,972.76
Bronze 3000 ($5,000 Deductible): $4,856.52 + $6,350 = $11,206.52
Silver 2000 ($2,000 Deductible): $5,654.28 + $5,500 = $11,154.28
Gold 1000 ($1,000 Deductible): $6,687.36 + $6,550 = $13,237.36
Platinum 200 ($200 Deductible): $7,900.68 + $3,500 = $11,400.68
Analysis
Comparing the Birdville Independent School District Bronze and Gold policies, the difference in premiums is $2,136, while the out-of-pocket maximum is $2,800 more for the Gold plan. In the case of catastrophic illness or injury, then the total amount a family insured with the Gold plan would spend for health insurance and healthcare would be $4,936 more than they would have under the Bronze.
Likewise, analysis of the Freelancers Insurance Company offerings reveals a similar structure. Comparing the Catastrophic with the Platinum policies, the out-of-pocket maximum is actually $3,100 less for the Platinum plan, but the difference in premiums is $5,527.92. Again, if an individual insured by one of these plans were to suffer major illness or injury, then they would end up spending $2,427.92 more to have Platinum level coverage.
Effect
Reliance on the deductible as a primary means of choosing health insurance does not necessarily correlate with the true economic value of the policy. Consumers typically spend a significantly higher amount on premiums to have lower deductibles, but this may not always translate into cost savings in the event of a catastrophic health event.
Relevance
Health insurance companies publish numerous financial variables such as premiums, deductibles, co-pays, co-insurance, and out-of-pocket maximums. Taking all of them into consideration when shopping for health insurance can be quite confusing. and the resulting purchase may not always be in the insured's best financial interest, ultimately. The Wacasey Equation may simplify the process by using only two terms - the premium and the out-of-pocket maximum.

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